In 1974, Congress enacted a law, the Employee Retirement Income Security Act (ERISA) which contains fiduciary rules, employee protection provisions and amendments to the Internal Revenue Code (IRC) that require employee benefit plan sponsors (employers or trustees in the case of multi-employer plans) to manage the assets held in employee benefit plans in accordance with their terms and in accordance with the law. Failure to do so can result in personal liability through litigation or governmental action or the imposition of monetary sanctions on plan sponsors in the case of operational or plan document violations-relating to retirement plans.
In order to avoid liability, the IRS and Department of Labor (“DOL”) have established programs that require plan sponsors to establish a self-audit compliance process that identifies and corrects operational and plan document violations prior to an audit by IRS or DOL. The evaluation of compliance with ERISA and the IRS is accomplished through an investigation of documents and personnel records that normally involve a review of: (i) employee benefit plans, trusts, summary plan description brochures, administrative manuals, employee communications and other related documents; (ii) annual financial returns filed on behalf of employee benefit plans; (iii) personnel records which reflect the extent of compliance with procedures relating to employee enrollment, participation, vesting, change in employment status, contributions and benefit accrual, joint and survivor payment and notice requirements for married employees, proper calculation and payment of benefits and a myriad of other legal and regulatory requirements; and (iv) compliance with IRS requirements that prohibit discriminations in favor of highly compensated employees with respect to contributions and/or benefits provided by the employee benefit plan. This review is primarily conducted on-site at the location of the documents and personnel records across the country.
Plan providers typically wish to insure against the risk that, at some later date after conducting a compliance audit, the compliance audit will be found to be out of compliance by the regulating authority and a fine or some other penalty imposed. Insurers have responded to this market demand by offering various insurance products directed to insuring against these risks. For example, coverage under an insurance product may include coverage for IRS closing agreement penalties, the cost of corrections that are required by the IRS as a result of an IRS compliance audit, and earnings on any corrective contributions paid to the plan by the insured as a result of an IRS audit.
As part of matching the insurance product to the plan provider, the insurer must accurately assess the risks faced by the plan provider, value those risks and determine an appropriate insurance product, if any, to offer to the plan provider.
Often, there is an added complication that the information necessary to assess such risks is confidential to the plan provider and its confidentiality must be maintained to one degree or another, sometimes even from the insurer. Thus, the insurer must assess the risks based on information that the plan provider wishes to keep confidential from the insurer.